'I've been a fan of emerging markets since the 70s and had fantastic returns': Why investing in Turkey or Indonesia could pay off in the long-run

The shops, bars and restaurants of Istanbul are open way past midnight as more than 13 million people come out to enjoy the cool of the evening. And they have money to spend.

Turkey’s economy has been one of the world’s better performers over the past decade. The per capita GDP – the value of the economy per head of population – has jumped threefold since 2001, reaching just over $10,000 (£6,200) last year.

A strengthening of the Turkish lira has boosted consumers’ spending power, sucking in imports of televisions, phones and the expensive cars that now clog Istanbul’s roads. Turkey’s ISE stock market index has gained more than 30 per cent since the start of the year.

Steady course: Charles Buchan buys an investment and holds on to it

This sort of rapid turnround in economic fortunes helps to explain the
appeal for investors of emerging markets such as Turkey, Russia, India,
Indonesia and China.

With relatively low levels of debt –
both for individuals and governments – and big populations hungry for
better lives, their capacity to grow over the longer term is greater
than the ‘old world’ of the US, Europe and Japan.

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Despite the advances of the past
decade, there is still plenty of scope for Turkish businesses to expand.
Handan Saygin, a senior vice-president at Garanti, Turkey’s
second-biggest private bank, says: ‘There is still huge potential for
growth in the domestic market.

‘Only half of the 52 million adults in Turkey have a bank account or
financial product such as a debit card. Mortgage penetration is low,
with only about one million mortgage accounts in total.’

Charles Buchan, 66, is one British
investor who has put his faith in emerging markets. The retired physics
teacher has built an extensive investment portfolio that includes
investment funds Templeton Emerging Markets, specialist country funds JP
Morgan India and JP Morgan China, and Fidelity South East Asia.

He says: ‘I’ve been sold on emerging
markets for a long time. I started putting money into these fast-growing
regions in the late Seventies and I’ve had some fantastic returns.’

Charles, who lives in Fraserburgh,
Aberdeenshire, with his wife Georgina, a careers guidance teacher, says:
‘Experience has taught me to go with my own instincts rather than to
follow the crowd when it comes to investing. I buy an investment and
hold on to it.’

Charles keeps busy in retirement as
an SNP councillor for Aberdeenshire and sits on the local fisheries
committee. ‘I’m a great believer in India,’ he says. ‘It hasn’t quite
come off yet, but with its huge population when it gets going it’ll be a
great investment story.’

But this long-term potential for
emerging markets has to be balanced against short-term wobbles.
Jason Witcombe, director of London-based adviser Evolve Financial
Planning, says: ‘People like emerging markets because the term sounds
exotic.

But that doesn’t guarantee better investment performance. They
carry more risk and should produce better returns over the long run but
there will be volatility along the way.’

Turkey has not been immune from the
world’s wider economic woes. Stagnation in the European Union, its
biggest export market, has hit growth, which is forecast to slow from
8.5 per cent in 2011 to 2.3 per cent this year and about three per cent
next year.

Brazil, long heralded as a future
economic star, has seen growth slow in the past 18 months, with alarm
bells ringing over inflation, excessive red tape and a lack of
investment. Even mighty China, the juggernaut of world growth in recent
years, is experiencing problems.

As a result of these economic hiccups, investors must look for fund
managers who can pick companies and markets with the best potential to
carry on growing.

Ben Willis, head of research at
investment adviser Whitechurch Securities in Bristol, says: ‘Each nation
has its own unique characteristics and stock markets will differ hugely
in their performance.’

Population changes will play a part
in this. China’s growth could falter as smaller numbers of workers have
to support an ageing population. Its working-age population is forecast
to peak around 2016, according to the United Nations.

By contrast, nations such as Mexico, the Philippines and Turkey will
have growing labour forces for at least two decades and may vie for
manufacturing work currently done in China.

Philip Poole, global head of investment strategy at HSBC, says:
‘Demographics are important and the countries with the best demographics
are those where the working-age population will continue to rise.’

Mark Lewis, the International
Monetary Fund senior resident representative for Turkey, says: ‘Turkey
has to take advantage of its demographic opportunity. It has a youthful
population with a high proportion of teenagers and young adults. This
means lots of people joining the labour market in the future, growing
the economy’s capacity.

‘However, policymakers have the
challenge of ensuring that good jobs are available and workers are
equipped with the skills to do them.’

Working as a lawyer involved in
international litigation has helped give Duncan Speller a better insight
into investing in global markets.
Duncan, 34, lives and works in central London, but he has travelled
widely to countries such as South Africa, Russia and Turkey, both on
business and for holidays.

‘That travel makes me more comfortable with investing in these parts of
the world,’ he says.
‘You can see the infrastructure that is already in place, you can sense
the dynamism of the economies and you can also see some of the potential
issues which could cause problems.’

Duncan, who is single, invests in
Fidelity Emerging Europe Middle East and Africa fund. About 60 per cent
of the fund is invested in Africa, with a big exposure to South Africa
and Nigeria. It also invests in companies in Turkey, Russia and Eastern
Europe.

He says: ‘I am building a pool of
savings for the future. I feel that over the medium term the prospects
of economic growth are stronger in the emerging world than in the
developed world.’

Turkey: The bridge to Asian wealth

Money to spend: Turkey's economy has been one of the world's better performers over the past decade

Turkey,
where East meets West at the Bosphorus, is a famous melting-pot of
cultures.
But the country also marks an economic boundary – between the developed
West, with its problems of debt, ageing populations and low growth, and
the increasingly wealthy East. Its bubbling economy offers insights into
how investors should size up the opportunities and dangers posed by the
new, emerging financial world order.

Elena Shafton, an emerging markets guru with fund group Jupiter, seizes
on Turkey’s youth. She says: ‘The average age in Turkey is 29, but what
does that mean? They are driven by aspirations to become more Western
and more prosperous, trading up is a cultural trend.’

Shafton also cites Turkey’s growing levels of education, political engagement and productivity. ‘About 15 years ago one of the starkest problems was a low retirement age and high unemployment,’ she says.
‘Now, they seem to be the hardest-working people in Europe. While the developed world’s consumption of luxuries comes from accumulated wealth, for Turks it’s about disposable incomes.’

Turkey’s economic patterns offer insights into other emerging nations. China’s population is ageing faster than other emerging nations, bringing with it problems more akin to those in the West. But nations like Indonesia or Russia, with young and educated populations and low inflation, are more akin to Turkey.

What is the key to emerging nations’ promise? Shafton says: ‘The desire and ability to work is the essential component of their consumer revolution.’

HOW INVESTORS CAN ACCESS EMERGING MARKETS

Jason Witcombe at adviser Evolve
suggests the typical medium-risk investor puts no more than ten per cent
of their money in emerging markets, using a diversified global fund
rather than one focused on a particular country or region to reduce
risk.

He emphasises the importance of low
fund charges over the long term and suggests investments such as
Vanguard Emerging Markets Stock Index and Dimensional Emerging Markets
Core Equity. These have total annual expenses of 0.55 per cent and 0.84
per cent respectively, meaning less of your money goes in charges.

In contrast, Ben Willis at Whitechurch Securities and Damien Fahy at
broker FundExpert are fans of stock-picking emerging markets managers
who, they argue, can add value over the longer term despite higher
costs. Both like First State Global Emerging Market Leaders. It has a
solid record and, being conservatively invested in larger to mid-sized
companies, is less volatile.

For those willing to take more risk, Fahy suggests Jupiter India. He
says it will be a bumpy ride but he expects India’s youthful population
‘to drive reform, and ultimately growth, through the ballot box’. Willis
likes Aberdeen Emerging Markets because of its record and value-driven
approach.